Most construction company owners and managers spend 99 percent of their working hours on two of the three required operational functions it takes to make a profit and grow their companies. First you must win profitable revenue. Pounding the pavement to find good projects to bid on is a lot of hard work. Then it takes even more effort to estimate and put together a good bid. And then you lament over how much to mark up or cut your bid to beat out your competition. Second, after you land a contract, it takes even more hard work and time to get everything ordered, subcontracted, scheduled, installed, completed and paid.
All this effort to find and do work leaves little time to focus on the third and most important function required to make a profit. Knowing and tracking your numbers must be the number one priority for every construction business owner to be successful. Unless your goal is to be busy and broke, you must spend an equal amount of time focused on your accounting, financials and job costs. Too many construction companies do great work with excellent quality and make too little money because they don’t know what their costs are and how much they need to charge to make a reasonable profit at the end of the year.
Hard work makes you tired, not rich!
Without an accounting background, many tradesman go into business and win work charging prices that are accepted in the marketplace. By charging standard market prices, they can keep busy and pay their bills. But in the long run, this practice leaves them tired without enough profit to ever get ahead. To know your costs starts with learning what you need to know.
For example, every drywall contractor needs to know how many man-hours it takes to hang drywall per square foot. This requires them to have timecards with work tasks broken down by work activities their crew can fill out every day. Then at the end of every job, you can determine how many man-hours it took to complete the job tasks versus your estimated budget. Without this ongoing up-to-date knowledge, you’ll never know your costs, be able to track your jobs, estimate the next bid accurately or make any money.
Knowing your numbers requires owners and top managers of every construction company to learn how to read a financial statement, interpret income statements, calculate accurate job cost budgets, fill out work-in-progress reports, track overhead, determine how much sales are required, and know how much mark-up they need to make a profit. The mistake I see owners make is hiring a bookkeeper who is not experienced in construction accounting, and turn over all the finances to them without direction or knowing what they want them to do, except pay the bills and balance the checkbook. Business owners realize they need to know their numbers and job costs, but don’t dedicate the time required to learn what it takes to make a return on their assets, investments, risk and time.
To know your numbers and start making more money, you must first make learning construction accounting a top priority. As a foreman, you need to know what your employees need to do and how to do it. The same is true for accounting and business owners. You can’t run your company if you don’t understand construction finances. Take a class, go to a workshop, attend a boot camp, read a book or take an online class. Just like learning a trade, accounting and numbers take time to learn. But without them, you can’t run your business professionally or ever expect to get ahead or make any real money. And trying to farm it out to someone else doesn’t let you off the hook as the owner of your financial future.
Don’t think hard work will make you rich!
It seems as if business owners hope hard work will eventually make them money. But the odds they hit a jackpot, win the lottery or inherit a fortune to create profits are better than continuing to run their businesses the way they currently do. It takes knowing and focusing on numbers to keep you headed in the right direction. The following numbers you must know, track and review on an ongoing weekly and monthly basis, even if you hate numbers!
1. Know your mark-up numbers!
You must know how much mark-up you need to cover your overhead and profit for the entire year. Bidding lots of jobs won’t make your numbers work. You need to balance your overhead and profit goals with your mark-up and sales to end up at the year-end with the profit goal you want on your profit and loss statement.
2. Know your costs!
Bidding work starts with knowing exactly how much it costs to actually build the work. Do you know your labor, crew and equipment costs? How much does it cost to have a crew on a job per day? How much does it cost to own your trucks, tools and equipment? How many hours does it take your crew to hang 500 sheets of drywall on a ceiling 20 feet in the air?
3. Know how much sales you need!
How much revenue at what mark-up do you need to cover your overhead and then make a profit? The total annual sales required is determined by the annual overhead and profit you want divided by the gross profit margin you can get in the market you compete in. Do you know these numbers?
4. Know your numbers are accurate and timely!
Who cares what your numbers are six months after you complete your jobs? When you started your construction company, you invested in tools and equipment to build projects. Without a similar investment in a fully integrated accounting package that gives you weekly and monthly job cost updates, it won’t matter what equipment you have working and how fast your crew performs. In addition, you need someone to manage your accounting department who is an expert in job costing, construction financial statements, over-under billings, competed contracts and getting you the numbers you need to know to always make a profit.
Know your numbers!
Working hard and performing quality work doesn’t really matter unless you make it your priority to make a profit. Don’t delegate or ignore the most important part of your business. Stay on track by taking at least two to four hours every week to review these numbers with your accounting and project managers. This small time investment will give you a much better return than going out to the job site to try and encourage your field workers to go a little faster.
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George Hedley is a licensed professional business coach, popular professional speaker and author of “Get Your Business to Work!” available at his online bookstore. He works with contractors to build profitable growing companies. To request your free copy of “Profit 101 For Contractors,” sign up for his free monthly e-newsletter, hire Hedley to speak, be part of his ongoing BIZCOACH program, or take a class at Hardhat BIZSCHOOL online university, visit www.hardhatpresentations.com or email gh@hardhatpresentations.com.
